Kranz, SebastianLöffler, GunterPosch, Peter N.2017-12-042017-12-042017http://hdl.handle.net/2003/3623210.17877/DE290R-18246This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales, as well as uninformed predatory short sales, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A government commitment to bail out insolvent firms with positive probability can increase welfare because it selectively deters predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.enDiscussion Paper / SFB823;23/2017government bailoutsshort sale banspredatory tradingshort sales310330620working paper